What is a Market Index and Why do ETFs Track Them?

Think of a market index as a list of securities that represent a certain economic market or sector. An investor who wants to benefit from the growth potential of a certain market index can choose to do so through a fund that invests in the same securities as that market index.

ETFs track market indices by investing in the same securities and in the same weightage as a certain index. This is called passive investing as there may not be active calls on what to invest in on a daily basis.

With an ETF, investors can aim to grow wealth through exposure to entire stock markets or specific segments of the market, basis the representatives. What’s more, the absence of active management of these funds, results in them being cost-efficient than most other index funds. 

Different types of market indices

There are indices that track an overall market or a specific market segment. There are also indices on bonds, commodities, and currencies. These market indices aim to offer a true reflection of the value of the market segment they cover. They also offer investors exposure to specific segments in one efficient portfolio. 

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